This week has not been a good one for Belarus state-owned potash producer Belaruskali OAO and its potash marketing/exporting arm Belarusian Potash Co. (BPC).
On Jan. 10, major offtaker Yara International ASA announced that it planned to stop buying potash from Belarus, and had started winding down its sourcing of Belarusian potash. The company expects the wind-down to be completed by April 1.
On Jan. 12, the Lithuanian government reached a decision to end the railway transit contract between the country’s state-owned railway company, Lietuvos Geležinkeliai’s (LTG), and Belaruskali over national security concerns, effective Feb. 1.
Furthermore, any future intermediary for the potash producer seeking transit via Lithuania’s rail system would need approval from the country’s National Security Commission, Lithuania’s Transport Minister Marius Skuodis said, as cited by a Bloomberg report.
While Lithuania’s move to end the rail transit of Belarus potash had been widely anticipated (GM Jan. 7, p.1; Dec. 31, 17, & 10, 2021), the timing of the rail contract termination is sooner than some had expected.
For Belarus, the Lithuanian ruling means Belaruskali/BPC are losing their key potash export route, as most of Belarus’ potash for export is railed via Lithuania’s rail system for onward shipment from the Lithuanian port of Klaipėda.
The port shipped almost 10.7 million mt of Belarus potash in 2020 via the Biriu Kroviniu Terminalas (Bulk Cargo Terminal [BKT]) terminal, according to LTG (GM July 2, 2021). Belaruskali owns a 30 percent stake in the BKT terminal.
Belarus’ total potash exports in 2020 were 11.8 million mt, according to Trade Data Monitor (TDM).
Lithuania’s railways have continued to transport Belarusian potash despite U.S. sanctions on Belaruskali coming into force on Dec. 8. following a four-month wind-down period (GM Aug. 13, 2021). Additional U.S. sanctions on BPC were imposed on Dec. 2, which was not included on the initial U.S. sanctions list. They come into effect on April 1, 2022 (GM Dec. 3, 2021).
The U.S. sanctions do not cover Lithuania itself, but – as with European Union (E.U.) sanctions against the Belarusian regime – many Belarusian banks are under sanction. U.S. financial entities are prohibited from doing business connected with Belarusian potash, and consequently, they can no longer process Belaruskali’s financial transactions.
Green Markets Research Director Alexis Maxwell said the impact of Lithuania’s decision to end the Belarus key potash transit route is more limited for the U.S., as U.S. imports from Belarus are only some 6 percent of U.S. potash demand.
However, the decision will have a significant effect on Belarus’ shipments to Asia, particularly India and China, and to Brazil – regions that rely on U.S. financial institutions to provide letters of credit and insurance, she said.
The E.U. sanctions imposed against the Belarusian regime came into force on June 25 (GM June 25, 2021) and restrict imports of Belarusian potash into E.U. countries and implement a transit ban via E.U. countries, of which Lithuania is one, but Belarus’ 2021 supply contracts with India and China – i.e., those concluded before June – were not subject to the Brussels sanctions.
Crucially, a key grade of Belarusian potash also was excluded from the E.U. ban. Potassium chloride with a potassium content evaluated as K2O by weight, exceeding 40 percent but not exceeding 60 percent on the dry anhydrous product, is not included on the sanctions list.
The Belarus supply contract with China expired in December, and Maxwell said Belarus “is [now] in dire need of customers” after the supply contract expired.
“China is the largest global buyer of potash able to finance trade with a U.S-sanctioned company,” said Maxwell. “That means Beijing is in a better negotiating position and is able to leverage a Belarus contract for less than the Southeast Asian spot market price.”
But with Belarus currently accounting for around 20 percent of global potash trade, Lithuania’s decision to remove the key export route for Belarusian potash will undoubtedly put further pressure on global potash prices and other fertilizer prices and stoke further worries about food price inflation, which already is near an all-time high.
Belarus had signalled earlier it could opt to redirect its potash for transit via Russian ports, including the Russian Baltic port of Ust-Luga and the port of Murmansk. Belarus turned to Russian ports for shipment of oil products after they were included on the E.U. sanctions list against Belarus last June. Belarus claims the equivalent of 1 million mt/y of its oil product exports is now being routed via Russia following an agreement with Russia, according to local media reports.
According to Belarus Minister of Transport and Communications Aleksei Avramenko, as cited by a BelTA news agency report last August, the routes for potash transit via Russian ports have been worked out. However, some analysts have pointed to the much bigger volume of potash to be transhipped compared with Belarus oil products.
According to an article by Belarus pro-democracy and pro-human rights news site Charter97, when transported through Russia, the distance to the ports stretches to 1,096 km (500 km of it in Belarus) instead of 715 km (287 kilometres of it in Belarus) to Klaipėda.
According to the article, which was published last September, Belarusian Railways estimates the increase in delivery price using Russian ports is “at three to four dollars per mt.” However, the article did not indicate when this was calculated.
It is also unclear whether there is spare transhipment capacity at Russian ports for additional potash transhipment, and it is likely that what spare or new potash transhipment capacity there is would first of all be reserved for Russian potash exporters.
Moscow-based VTB Capital analyst Elena Sakhnova also noted that Moscow may be reluctant to agree to the transhipment of Belarus potash across its territory due to U.S. sanctions.
Kremlin spokesperson Dmitry Peskov on Jan. 13 refrained from responding to journalists whether Russia is prepared to transport potash from Belarus, saying “it is a sensitive issue,” Interfax and Russia’s Tass reported. However, the spokesperson also said that Russia “will not abandon its partner.”
In its Jan. 10 statement announcing it planned to stop sourcing potash from Belarus, Yara said: “Although sourcing from Belarus is in full compliance with applicable sanctions, other parts of the supply chain are withdrawing essential services required to enable potash exports from Belarus, as a result of which Yara has initiated a wind-down of its sourcing activities of Belarusian potash.”
“[Yara’s withdrawal] will have a really big impact on Belarus, as it sells about 40 percent of its output in Europe, mostly to Yara,” Bloomberg cited Sakhnova as saying in a phone call.
“It will be really hard to replace Belarus’ volumes should other clients, especially in Latin America, also start to wind-down,” Sakhnova said.
Yara previously has said it has flexibility in its potash supply options. The company said it has “a broad portfolio of potash suppliers” and “continuously maps alternative supply options to be able to respond to supply chain disruptions” (GM Aug. 20, 2021; May 28, 2021).
Yara International President and CEO Svein Tore Holsether said last year a change of supply arrangements “could have a cost, but as a large and stable potash buyer we are typically able to secure competitive terms.”
In the past several months since the disputed re-election of Alexander Lukashenko as Belarus president on Aug. 9, 2020, the Norwegian company said it has sought positive change by leveraging its presence in Belarus to promote occupational safety and human rights. Last August, Yara said it would make a decision on its further presence in Belarus by December. In its statement this week, it said will continue to monitor for any changes in the situation, including sanctions, as part of its ongoing sourcing operations.
Yara’s decision to wind down purchases of Belarusian potash amid tighter U.S. sanctions, as well as Lithuania’s decision to halt rail transit of Belarusian potash, not surprisingly, is seen as supportive for potash prices, and, in turn, for global “potash players” including ICL, Mosaic, and Nutrien, Moscow-based VTB Capital Equities analyst Artem Vodyannikov said, as cited by a Bloomberg report.
Belarusian authorities last month warned that “Belarus is ready to take measures in response” if Lithuania halts the transit of potash via its territory, and in particular, that Belarus “can block the railway transit in the direction of Lithuania, which is also a transit state,” according a report by Belarus’ tvr.by. (GM Dec. 24, 2021).
Belarus also has warned that it does not rule out banning the sale of Belarusian goods to Lithuania as a potential response if Lithuania were to stop the transit of Belarusian potash, according to the Belarus state-run news agency BelTA.
Belarus said BPC “will use all legal means to protect its rights, if Lithuania violates international agreements,” according to tvr.by.
The Belarusian authorities also warned that Lithuania may face “multibillion” lawsuits if the transit of Belarusian potash and fertilizers is banned, according to the tvr.by report.
Belarus said “most of the customers” will file lawsuits if they are left without goods and incur considerable losses “because of the actions of Lithuania,” as they will have to buy at higher prices.
In a further turn of the screw on the Lukashenko regime, it is reported that this week Lithuania is lobbying for tighter E.U. sanctions on Belarus’ potash industry in order to cap the higher profits being made by the Belarus regime after the introduction of sanctions, which had “the unwanted effect” of higher prices, according to a Bloomberg report, citing Lithuanian Foreign Minister Gabrielius Landbergis.
Lithuania wants the key grade of Belarusian potash currently not on the E.U. ban list – potassium chloride with a potassium content evaluated as K2O by weight, exceeding 40 percent but not exceeding 60 percent on the dry anhydrous product – to be covered by the sanction restrictions.
The Belarus potash grades under current E.U. sanctions make up only about a fifth of Belarusian potash sales to the Bloc, Landbergis told Lithuania’s LRT broadcaster, as cited by the Bloomberg report.
But while the sanctions imposed by the U.S., the E.U., and certain other countries, including Canada, the U.K., and Switzerland, on Belarusian potash are part of a raft of measures designed to put more pressure on the Lukashenko regime, it likely will be the ordinary people of Belarus that will be the hardest hit by the loss of potash export revenues.
Lithuanian companies and the country’s government also will take a major hit from the loss of revenue following the loss of Belarus potash cargoes.
The former CEO of LTG, Mantas Bartuška, last year estimated the rail company alone would lose around €60 million in annual revenue, and Lithuania’s entire logistics chain would lose over €100 million in revenue without Belarus potash cargoes.
The biggest winner is likely to be the Russian Federation: the Russian potash companies, the Russian port and rail companies, and others involved in the transportation chain, as well as Moscow.